Abstract

Prior to the Asian financial crisis, Southeast Asian economies became vulnerable by financing a large part of their infrastructure development with short-term, foreign-currency-denominated debt. The rapid buildup of short-term foreign loans aggravated the volatility of Southeast Asian currencies and was a major cause of the crisis. Now there is heightened awareness of currency-exchange and financial structure risks. To further mitigate these risks, the author recommends sovereign exchange-rate guarantees that go beyond automatic commodity-price adjustment formulas, a multilateral currency differential insurance program for medium and long-term facilities, taxes on short-term investment flows, and government efforts to target long-term, fundamental-driven foreign direct investment.